1099 Tax Hit
The realtor who continues to be involved in the SS says he needs to present all offers to the seller to protect him because whatever is written off on the short sale he has to report to the IRS...it will come back to him on the 1099 at the end of the year?
Does anyone know anything about this and what impact really does this have on the seller. Say the short sale is for 40K
Yes the owner will be taxed on the $40,000.00 at his normal tax rate plus a 7.65% self-employment penalty for fica,social security,and medicare. :cry:
That's not necessarily true....
Firstly, I don't believe that the real estate broker has anything to do with reporting anything to the IRS.... it's up to the mortgagee to issue the 1099.
Anyway, if the mortgagee agrees to forgive a portion of the loan, generally the mortgagee will report the amount of forgiven debt to the former mortgagor and the IRS on an IRS form 1099.
The IRS does treat forgiven debt as income, and that income may be subject to tax... or, as in the majority of cases, that income is exempt from tax.
The IRS has a test to determine if all or a portion of the income as reported on the 1099 is taxable. In the case of short sales, most often the issuance of an IRS form 1099 is a non-issue.[ Edited by TheShortSalePro on Date 04/02/2004 ]
Self tax...only if the owner is self employed, correct?
On the FAQ site I found the following:
"The homeowners may still owe the difference between the mortgage balance and the discounted amount via a “deficiency judgment.” If granted, this judgment will affect the homeowners and their credit report just as any other judgment. You must get the bank to agree to accept “payment in full without pursuit of any deficiency judgment.” In addition, you need to explain to the homeowners that the discounted amount (the difference between the mortgage balance and the short sale) may be declared as income on their income tax return by means of a “1099.” The homeowners can speak with their accountant for advice. Since the homeowners have been in such duress and probably haven’t made much income, a 1099 may not adversely affect them."
Has anyone been successful in getting the lender to accept “payment in full without pursuit of any deficiency judgment.” If so how?
Also, with their depressed financial situation is this really a tax hit to worry about...say should a seller try and hold out for a SS offer that is for 20K instead of 40K? That is what the realtor involved is advocating...he is the advocate to insure the homeowner doesn't have to get hit for me than necessary.
What do the experts on this board have to say?
I agree with TheShortSalePro. The Realtor won't report but the Lender will send the 1099.
With the hardship of the seller during that tax year this should be a non issue.
Thanks again SSPro!
You get the bank to forget about a def. judgement by asking them or telling them that the deal is contigent on that point. Also, you can explain to the home owner that it is up to them whether to proceed with a SS if the bank will not back down on that point. Some are so bad off that they will be filing bankruptcy later and that judgement will be, "poof ", gone.
Kelly (WI)
First, I don't think the realtor is telling the truth. The lender is required to report any "relief of indebtedness income" which is deemed unearned income and is subject only to income tax.
Second, always stipulate in your contract that there will be no deficiency against the original borrower, and no 1099 issued to the original borrower. As a practical matter, most of the "deficiencies" are uncollectable. Lenders know this and generally do not waste money pursuing them to a judgment but they may sell them outright or turn them over to a collection agency. Lenders always run credit reports on the borrower, prior to approving the short sale. If the borrower has other assets to satisfy the lender's claim, the short sale won't be approved.
Third, absent a deficiency, it is the title company that reports income to the IRS. The title company takes the contract between the parties and generates the HUD-1 and the 1099 that is sent to the IRS.
Fourth, always recommend that your homeowner/seller consult a bankruptcy attorney. A short sale always generates relief of indebtedness income for the original borrower. Whether that income is actually reported to the IRS is immaterial. The borrower is required to self report. If the borrower files for bankruptcy, the debt will be discharged and there will be no tax consequence for the "relief of indebtedness income."
Fifth, a bankruptcy will literally zero out the homeowner's bad credit scores. Because your short sale will prevent a foreclosure, if the homeowner files for bankruptcy he will have perfect credit in two years and be able to purchase a home with any lender.
Finally, a borrower can get a home loan one day out of bankruptcty, through a sub-prime lender. The same is not true for foreclosures.
[ Edited by Hollismathews on Date 04/15/2004 ]